CIMA BA2 · Chapter 12 · Question 13 of 13
A company will pay $5,000 a year for 5 years to lease a machine, with each payment made IN ADVANCE (the first payment is made today). The cost of capital is 10%. The annuity factors at 10% are: 4 years 3.170; 5 years 3.791. What is the present value of the lease payments?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $20,850
Explanation
The first payment is at time 0 (factor 1.000) and the remaining four are at the end of years 1 to 4. PV = $5,000 x (1.000 + 3.170) = $5,000 x 4.170 = $20,850. Using the 5-year factor (3.791) wrongly assumes payments in arrears.
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